Can Rush Limbaugh’s New Contract Save iHeart Media?

Rush Limbaugh might have just saved iHeartMedia (OTC: IHRT) from death. The king of talk radio just signed a new contract with iHeart subsidiary Premiere Radio Networks to do four seasons of his show.

The amount of the contract is not known but observers in the media think it will be far less than the $400 million deal he inked in 2008, The New York Times Deal Book reported. This time around neither iHeart nor Rush himself bothered to leak any details to the media a sure sign of a major pay cut.

Rush even told his radio listeners that the financial terms were secret, Deal Book noted. That’s a sure sign that he’s making a lot less money, entertainers and athletes only keep the numbers secret when they take a pay cut.

Rush lives big his EIB one Gulfstream private Jet.
Rush lives big his EIB one Gulfstream private Jet.

The announcement will at least end speculation that Rush would dump traditional radio for the satellite-based digital service Sirius XM (NASDAQ: SIRI). It still leaves iHeart’s future in doubt after several major radio stations around the county dropped Rush’s chat fest because major radio advertisers will not touch it.

The most likely scenario is that Rush and iHeart had to change the terms radio stations sign to run Rush’s show. A strong probability is that Rush will no longer be able to force local stations to run his exclusive advertisements for products, and he will have to charge them less for his programming.

Another possibility is that Rush and iHeart may have to forgo the fees they charge radio station operators for the show. Instead they might have offer something like revenue sharing. In May Politico reported that many smaller stations were dumping Rush because they could no longer afford him.

Is iHeart Media about to Collapse?

The data available from ycharts indicates that iHeartMedia is a very sick company that might be on the verge of collapse. The highlights of the latest financial numbers; those from March 21, 2016, paint a very dismal picture.

The problems at iHeart include:

  • A net income of -$458.17 million.

 

  • A profit margin of -6.59%

 

  • A deleted earnings per share number of -5.43
It's good to be rich. Inside Rush's private jet.
It’s good to be rich. Inside Rush’s private jet.
  • A free cash flow of -$297.27

 

  • -$81.58 million in cash from operations.

 

  • Liabilities of $24.23 billion.

 

  • An Enterprise Value of $20.05 billion

RushLimbaugh_1246506c

  • Assets of $13.38 billion

 

  • Revenues of $6.260 billion.

 

After reading that one has to wonder what exactly is iHeart planning to pay Rush with? It is obviously not stock options, iHeart was trading at $1.29 a share on the last day it was available (August 3, 2015).

My guess is that iHeart had to sign over part of its revenue or gross to Rush to get him to stay. If that’s the case this company is even more worthless than we thought. An interesting possibility is that iHeart management wanted to keep Rush to at least give the company some value.

They might be hoping that Rush’s contract might entice Liberty Media’s (NASDAQ: LSXMB) John Malone who also owns Sirius to buy their company. Whether such a deal would work or not is anybody’s guess. iHeart is he sort of troubled entertainment company that Malone likes to buy and reorganize so it might end up in the Liberty stable at some point.

With or without Rush, iHeart seems to be very close to death. It remains to be seen whether he can save this company from a changing radio market. Perhaps Rush should have washed his hands of broadcast and followed Howard Stern to Sirius. The latest Limbaugh deal shows us that broadcast radio might be no longer be a viable business.

Why Rush Needs iHeart and iHeart Needs Rush

At the end of the day, Rush and iHeart need each other desperately. iHeart is the only entity out there that can provide the kind of nationwide platform Rush needs to reach his audience. Nobody not even Sirius; nor CBS Radio (NYSE: CBS), has the reach of iHeart into the American heartland.

iHeart needs rush because he is one of the few marquee attractions it has left. Pandora (NYSE: P) for all its problems has effectively captured music. Sports simply cost too much, and no other national talk show host has the appeal or reach that Rush does.

FILE - In this Jan. 13, 2009 file photo, conservative talk show host Rush Limbaugh talks with guests in the East Room of the White House in Washington. Nevada Democratic Congresswoman Shelley Berkley is launching a petition to pull Limbaugh's show off the air after his comments about a Georgetown University law student. And in her latest attempt to link her opponent in a tight Senate race to national controversy over contraception, she's asking incumbent Republican Sen. Dean Heller to sign it. (AP Photo/Ron Edmonds, File)
FILE – In this Jan. 13, 2009 file photo, conservative talk show host Rush Limbaugh talks with guests in the East Room of the White House in Washington. Nevada Democratic Congresswoman Shelley Berkley is launching a petition to pull Limbaugh’s show off the air after his comments about a Georgetown University law student. And in her latest attempt to link her opponent in a tight Senate race to national controversy over contraception, she’s asking incumbent Republican Sen. Dean Heller to sign it. (AP Photo/Ron Edmonds, File)

This means that Rush and iHeart had to make some sort of deal, I imagine they settled for a lot less cash and gave Rush far more power. My suspicion is that Rush probably settled for a fraction of his 2008 price; probably around $100 million, in order to preserve his show and his empire. In exchange, iHeart probably agreed to share more revenue with Rush, and possibly give him more editorial freedom.

Why Sirius Does Not Need Rush

The second quarter financial numbers also show us why Sirius did not make a serious offer to Rush. The satellite radio provider does not need him; because it is one of the few digital entertainment providers that is actually making money, without Limbaugh.

On June 30, 2016 Sirius XM reported the following numbers:

  • $4.802 billion in revenue

 

  • $645.54 million in net income.

Rush-Limbaugh-Studio

  • A quarterly profit margin of 14%

 

  • A free cash flow of $395.1 million.

 

  • Assets of $8.14 billion

 

  • Cash and short term investments of $476.45 million.

 

  • $1.326 billion in cash from operations.

 

So strangely enough, Sirius XM does make some money and have float. It’s actually doing a lot better than bigger and flashier digital entertainment companies like Netflix (NASDAQ: NFLX) and Pandora. Netflix reported a net income of $141.02 million and a free cash flow of -$237.11 million on June 30, 2016, while Pandora reported a “net income” of -$296.77 million and a free cash flow of -$72.80 million on the same day.

This of course shows us another reason why Rush is not so anxious to move to digital: nobody; except Sirius with its captive audience of car owners, seems to have figured out how to make money in digital yet. At iHeart Rush can at least make some money; advertising chocolate-covered cherries and Lifelock security plans between monologues, on digital he might not make a cent.

So expect Rush Limbaugh and iHeart to remain fixtures on our radio dials for the foreseeable future. Also expect iHeart to end up part of some larger organization perhaps Sirius at some point.